Enservco, Inc. v. Indiana Securities Div.
| Decision Date | 29 October 1993 |
| Docket Number | No. 49S02-9310-CV-1195,49S02-9310-CV-1195 |
| Parties | ENSERVCO, INC.; Western Environmental Resources, Inc.; Associated Environmental Systems, Inc.; and Don James, Appellants (Plaintiffs Below), v. INDIANA SECURITIES DIVISION, et al., Appellees (Defendants Below). |
| Court | Indiana Supreme Court |
Robert S. Walters, Barrett & McNagny, Fort Wayne, for appellants.
Pamela Carter, Atty. Gen., John T. Roy, Deputy Atty. Gen., Indianapolis, for appellees.
Lee Polson, Christine P. Files, King, Polson, & Associates, Inc., Austin, TX, Erick D. Ponader, Wooden, McLaughlin & Sterner, Indianapolis, for amicus curiae North American Securities Adm'rs Ass'n, Inc.
The Indiana Securities Commissioner found that Enservco and others had violated this state's franchise disclosure laws and he entered various remedial orders. The respondents contend, among other things, that the Commissioner did not have proof of their scienter. We hold that scienter is not required.
On August 14, 1989, the Securities Division of the Office of the Secretary of State filed an administrative complaint against respondents Enservco, Inc. ("Enservco"), Western Environmental Resources, Inc. ("Western"), Associated Environmental Systems, Inc. ("AES"), and Don James. The complaint alleged that respondents offered and sold a franchise in violation of the antifraud provision of the Indiana Franchise Disclosure Act, Ind.Code Ann. Sec. 23-2-2.5-27 (West 1989).
The charges of franchise fraud stem from alleged misrepresentations and omissions in connection with the sale of rights to a proprietary system for testing underground tanks. On March 1, 1988, AES of Indiana, Inc. ("AES/Indiana") purchased the right to use the system in Indiana from Enservco, a California corporation which owns the rights to the technology. The system utilizes computer-driven software and fluid testing and measuring equipment to test for leaks in underground storage tanks. AES/Indiana simultaneously purchased the necessary equipment and specially-equipped vans from Western, a California corporation which sells testing equipment and hardware for the system.
There was an evidentiary hearing on the administrative complaint, and on January 30, 1990, the Commissioner entered his Findings of Fact, Conclusions of Law, and Final Order. The Commissioner ruled that Enservco, Western, AES, and James 1 committed fraud during the negotiations leading to AES/Indiana's purchase of rights to the tank testing system. Specifically, the Commissioner concluded that respondents violated Ind.Code Ann. Sec. 23-2-2.5-27 by (1) omitting to disclose to AES/Indiana the material fact that tests conducted by the Environmental Protection Agency in September 1987 indicated that the AES tank testing equipment did not meet EPA standards; (2) omitting to disclose to AES/Indiana the material fact that completion of tank testing in Indiana could take longer than the simulated testing AES/Indiana had observed at a site in California; and (3) revoking an option/right of first refusal to operate in the state of Ohio which respondents had agreed to grant to AES/Indiana. The Commissioner ordered respondents to cease and desist from violating Ind.Code Ann. Sec. 23-2-2.5-27, and, pursuant to Ind.Code Ann. Sec. 23-2-2.5-6, revoked all exemptions from franchise registration as to all respondents. The Commissioner ordered respondents to pay $1,075.00 in costs.
Enservco filed an appeal from this order in Marion Circuit Court pursuant to Ind.Code Ann. Sec. 23-2-2.5-44 and Sec. 23-2-1-20 (West 1989). Enservco moved for summary judgment, asking the court to reverse the Commissioner's order because it could not be sustained as a matter of law on the findings of fact or the administrative record. Enservco moved in the alternative for a trial de novo pursuant to Ind.Code Ann. Sec. 23-2-1-20(c).
The court denied Enservco's motion. It also declined Enservco's request for an evidentiary hearing de novo and instead based its decision on the administrative record and oral arguments.
The trial court held that the Commissioner's conclusions about Enservco's violations were sufficiently supported by evidence in the record. Accordingly, the court affirmed the Commissioner's order in all respects.
The Indiana Court of Appeals reversed the trial court's affirmance of the Commissioner's order and remanded with the instruction that the Commissioner set aside his order. Enservco, Inc. v. Indiana Securities Division (1992), Ind.App., 605 N.E.2d 256. It did, however, affirm the assessment of costs against Enservco. Id. at 270 n. 25. We grant transfer.
The Commissioner presents two issues in his petition for transfer: (1) whether the trial court applied the correct standard of review to the Commissioner's order, and whether it erred in declining Enservco's request to introduce additional evidence to supplement the administrative record; and (2) whether the Commissioner's order is adequately supported by the evidence, in particular whether each of the elements of franchise fraud was established.
The Administrative Adjudication Act does not apply to orders of the securities Commissioner. Ind.Code Ann. Sec. 23-2-1-24 and Sec. 23-2-2.5-50 (West 1989). Instead, Ind.Code Ann. Sec. 23-2-1-20 provides the standard for judicial review of orders of the Commissioner. See also Ind.Code Ann. Sec. 23-2-2.5-44 (). An appeal from an order of the Commissioner proceeds in a trial court as follows:
(c) [T]he commissioner shall ... make, certify, and deliver to the appellant the transcript [of the administrative proceedings], and the appellant shall ... file the same and a copy of the notice of appeal with the clerk of the court, which notice of appeal shall stand as appellant's complaint, and the commissioner may appear and file any motion or pleading and form the issue. The cause shall be entered on the trial calendar for trial de novo and given precedence over all matters pending in the court.
(d) The court shall receive and consider any pertinent evidence, whether oral or documentary, concerning the order of the commissioner from which the appeal is taken.
Ind.Code Ann. Sec. 23-2-1-20(c), (d) (emphasis added).
Relying on Ind.Code Ann. Sec. 23-2-1-20(c) and (d), Enservco asked the court to hold a trial de novo to review the Commissioner's order. Enservco argued it "would be impermissible" for the court to sustain the Commissioner on the basis of the existing record, because section 20(c) and (d) entitle Enservco to present additional oral and written evidence in a trial de novo. Enservco offered to introduce additional evidence, but did not specify the subject matter or relevance of such evidence.
At the commencement of the hearing, Judge Ryan stated that he believed a de novo evidentiary hearing was unnecessary "unless somebody comes up with something that's new and startling." (Record at 563). Enservco declined to seize this opportunity.
Enservco argues that the court erred in refusing to allow it to present additional evidence to supplement the administrative record. Enservco contends that a reviewing court should afford an order of the securities Commissioner less deference than is required when reviewing agency decisions pursuant to the Administrative Adjudication Act.
The Commissioner contends that the court properly applied a deferential standard of review. The statute's "trial de novo" provision does not contemplate full retrial of the issues, he says, but a more limited judicial review. The Commissioner further contends that the doctrine of distribution of powers and the general principles of administrative law limit the scope of a court's review to determining whether the administrative agency had jurisdiction over the matter decided, whether the administrative findings and order are supported by substantial evidence, whether the order was made according to proper legal procedure, and whether the order violates any constitutional, statutory or legal principle.
This Court has not yet spoken to the standard of review contemplated by Ind.Code Ann. Sec. 23-2-1-20(c) and (d). We first consider here the proper standard, before moving to determine the propriety of the trial court's decision in this case.
To obtain judicial review of an order of the Commissioner, a party must, among other things, file with the trial court the transcript of the administrative proceedings and a copy of the notice of appeal. The notice of appeal stands as the complaint, and the cause is "entered on the trial calendar for trial de novo." Ind.Code Ann. Sec. 23-2-1-20(c).
Although the term "trial de novo" is commonly understood to mean "a proceeding where a reviewing court decides facts anew, reweighs evidence, or substitutes its judgment for that of the fact-finder in the administrative proceeding," 2 the provisions of Ind.Code Ann. Sec. 23-2-1-20(c) and (d) indicate that the legislature did not intend for the courts to apply the traditional standards of de novo review to orders of the securities Commissioner. Subsection 20(d) prohibits retrying the facts or reweighing the evidence by limiting the additional evidence the reviewing court may consider to "any pertinent evidence ... concerning the order of the commissioner from which the appeal is taken." (Emphasis added). This language suggests a deferential review limited to consideration of the legal validity of the order of the Commissioner. It calls upon a court to admit only such evidence as necessary to aid it in determining whether the agency's order was made in conformity with proper legal procedure and within the agency's jurisdiction, whether the order is based upon substantial evidence, and whether the order violates constitutional, statutory, or legal principle. S...
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